Although this narrative is compelling, a different dynamic seems to be at work. Indeed, S&P 500 stock index futures – a go-to proxy for overall risk appetite – found a bottom and began to climb at around 5:30 GMT yesterday, long before the US data set came across the wires (and well ahead of the unexpectedly strong Eurozone PMI figures as well, for that matter). Rather than any specific catalyst, we suspect seasonal factors are behind recent price action. While there has been no meaningful progress on resolving the Eurozone debt crisis or assuaging investors’ general unease with the increasingly dour outlook for global economic growth, there hasn’t been significant deterioration either beyond what investors were already aware of. This means that without fresh kindling to feed fires of risk aversion, a period of profit-taking and consolidation had scope to emerge by default.

The markets find themselves just ten days removed from the Christmas/New Year holiday period observed in most major financial centers, with most trend-defining scheduled event risk between now and 2012 already out of the way. As such, traders have likely turned their attention to squaring their books and starting to pack up for vacations, preferring not to force any major moves or over-commit to their positions until January. On balance, this suggests that barring a major change in the overall landscape (like a credit downgrade of a large European sovereign for example), a corrective bounce followed by consolidative sideways trade is the likely trajectory over the near term.

This is precisely the dynamic expected to be at work into the end of the trading week. The European economic calendar offers only low-tier releases. Elsewhere, US Consumer Price Index figures on tap later in the day are forecast to see both the headline and core inflation rates remain unchanged from the previous month in November, meaning investors are unlikely to derive any new insights vis-à-vis the Federal Reserve policy outlook from the outcome. Meanwhile, S&P 500 futures are trading 0.7 percent into positive territory, hinting the unwinding of risk-averse positions is set to continue to the detriment of the safe-haven US Dollar.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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